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Edited Transcript of SXC earnings conference call or presentation 20-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 SunCoke Energy Inc Earnings Call

Knoxville Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of SunCoke Energy Inc earnings conference call or presentation Thursday, April 20, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Fay West

SunCoke Energy, Inc. - CFO and SVP

* Fritz Henderson

SunCoke Energy, Inc. - Chairman, CEO and President

* Kyle Bland

SunCoke Energy, Inc. - Director IR

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Conference Call Participants

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* Brett Levy

Loop Capital Markets LLC, Research Division - Research Analyst

* Lee McMillan

Clarksons Platou Securities, Inc., Research Division - Analyst

* Lucas Pipes

FBR Capital Markets & Co., Research Division - Analyst

* Phil Gibbs

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

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Presentation

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Operator [1]

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Good morning. Welcome to the SXC First Quarter 2017 Earnings Conference Call. Kyle Bland, Director of Investor Relations, you may begin your conference.

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Kyle Bland, SunCoke Energy, Inc. - Director IR [2]

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Thank you, Stephanie. Good morning, and thank you all for joining us to discuss SunCoke Energy's First Quarter 2017 Earnings. With me are Fritz Henderson, our Chairman, President and Chief Executive Officer; and Fay West, our Senior Vice President and Chief Financial Officer.

Following the remarks made by management, we will open the call for Q&A. The conference call is being webcast live on the Investor Relations section of our website, and a replay will be available for a few weeks. If we don't get to your questions on the call today, please feel free to reach out to our Investor Relations team.

Before I turn the call over to Fritz, let me remind you that the various remarks we make on today's call regarding future expectations constitute forward-looking statements, and the cautionary language regarding forward-looking statements in our SEC filings apply to the remarks we make today. These documents are available on our website as are reconciliations to any non-GAAP measures discussed on today's call.

With that, I'll turn it over to Fritz.

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [3]

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Thanks, Kyle, and thank you all for joining the call this morning. Before we discuss our first quarter results, we did announce this morning that we've terminated discussions with the Conflicts Committee of the SXCP board regarding the proposed simplification transaction. And while this wasn't the outcome we were hoping for, I want to make a few points this morning.

My first point is to thank you, our investors. Unitholders provided feedback to the Conflicts Committee. We monitored that information, as you would expect we would, and that was helpful for our Conflicts Committee. We received feedback from many of our SunCoke Energy shareholders, both before and after the qualifying income regulations were finalized by the IRS, and this feedback was helpful for us to understand how you were thinking about the proposed transaction, both in terms of value and strategic rationale.

We continue to believe in the benefits of a combined structure for both SXC and SXCP stakeholders, especially in light of the changes in the IRS qualifying income regulation, but we were not able to reach agreement on an exchange ratio with the Conflicts Committee. And while disappointing, parties sometimes disagree. But we need to move on, so we've terminated the process with the committee.

While we couldn't reach agreement on the transaction, we do remain encouraged about the business going forward. We have several important initiatives in 2017 that remain our top priorities, namely optimizing our existing assets, including the rebuild projects in Indiana Harbor, and delivering against our financial guidance targets. We do see opportunities in our coke and logistics businesses and believe our competitive advantages position us to capitalize on these opportunities and drive value for shareholders and unitholders prospectively.

Shifting gears to the quarter, Page 4. We continue to be pleased with the overall safety and operating performance of our coke and logistics assets and continue to see sustained performance in our -- in the rebuild ovens in Indiana Harbor. We finished up work on our 2016 oven campaign in the first quarter of this year, and we're just beginning work now on the 2017 rebuild campaign here in April.

As a reminder, we expect to complete approximately -- not approximate, 53 ovens and to rebuild them as part of this year's oven campaign. We handled record volume at the Convent Marine Terminal in the first quarter with nearly 2.1 million tons of inbound throughput, which contributed to a strong first quarter adjusted EBITDA for SunCoke Energy of $55.6 million.

And lastly, with 3 months of the year behind us, we're well positioned to achieve our fiscal year 2017 targets.

With that, I'll turn it over to Fay to review the earnings in the quarter.

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Fay West, SunCoke Energy, Inc. - CFO and SVP [4]

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Thank you, Fritz, and good morning, everyone. Turning to Slide 5. You can see that quarterly EPS of $0.02 per share was up $0.08 versus the prior year period. This is driven by strong operating performance and the absence of nonrecurring items that netted in the prior year period.

Consolidated adjusted EBITDA for the first quarter was $55.6 million and was up nearly $12 million, due primarily to higher volumes in our Coal Logistics segment. The quarter also benefited from lower corporate and legacy costs driven by the lapping of prior year legal costs and the benefit of our Coal Mining divestiture.

Turning to Slide 6 and taking a deeper look at our adjusted EBITDA results. Indiana Harbor's first quarter adjusted EBITDA loss of $3.1 million was down $4.9 million versus the prior year period. The quarter was impacted by the 2016 oven rebuild campaign, which continued into February and resulted in lower volumes and higher O&M spend versus the first quarter of 2016.

Additionally, as anticipated, we continue to experience this degradation of the nonrebuilt ovens, which also impacted volumes in the quarter versus the prior year.

Excluding Indiana Harbor, the remainder of the coke business on balance performed as expected with various pluses and minuses across the fleet. Notably, Brazil coke was up $2.1 million, due largely to the increased technology and licensing fees that were driven by the contract change we agreed to with ArcelorMittal in late 2016.

Our Coal Logistics business had a strong start to the year and was up $7.2 million, primarily due to the increased volumes at CMT, which continues to benefit from an attractive coal export market.

Our Corporate and Other segment, which now includes our legacy Coal Mining business, benefited from our Coal Mining divestiture as well as the lapping of certain legal costs in the prior year period.

Overall, with adjusted EBITDA of $55.6 million, we are off to a good start in 2017.

Looking at Domestic Coke results on the next slide. First quarter adjusted EBITDA per ton was $53 on 948,000 tons of production. These results reflect the impact of lower production and higher cost at IHO and consistent results from the rest of our Domestic Coke fleet.

We continue to see sustained oven performance from our 2015 and 2016 rebuild campaign. The 2017 rebuild campaign of 53 ovens is currently underway, and we expect to work on the ovens ratably through November of this year.

At Granite City, we are gearing up for a major planned outage here in Q2 and expect that it will impact second quarter results. This outage was contemplated as part of our 2017 plan, and we remain on track to deliver our full year guidance.

Moving to Slide 8. In the quarter, we had higher volumes in our Coal Logistics business year-over-year with approximately 3.6 million tons at our domestic logistics facilities and 2.1 million tons at Convent.

On the domestic coal logistics side, volumes were slightly tempered due to mild winter weather, but we are tracking to our 2017 guidance of 15 million tons for the year.

At Convent, we earned $11 million of adjusted EBITDA in the first quarter, and this does not include the $3.2 million of deferred revenue that was recognized during the quarter. We remain on track to achieve our 2017 guidance of 8.5 million tons at this facility.

We continue to move merchant volumes in the quarter, albeit at a slower rate than Q4 2016, but expect to achieve our 500,000-ton merchant target in 2017 through increased volumes in the back half of the year.

As we look at our liquidity position for Q1, as you can see on the next chart, we increased our consolidated cash balance by $23 million and finished the quarter with $157 million of cash on the balance sheet. A key driver of this increase was the receipt of the second installment from ArcelorMittal related to their buyout of our preferred equity interest in the Brazil coke entity. In total, we have over $325 million of combined liquidity.

Looking at our capital allocation priorities on Slide 10. As the debt market remains attractive, we expect to refinance our capital structure at SXCP in the second quarter. Our goal is to push out maturities and maintain flexibility to repurchase a portion of our debt, all while keeping our borrowing cost reasonably flat.

At SXC, we are focused on allocating our free cash flow in the most efficient manner for shareholders. While repurchasing SXC shares would also be attractive at today's level, we believe repurchasing SXCP units in the open market is the best use of SunCoke's cash. This provides highly accretive risk-adjusted return through cash yield and tax synergies. Also, this is an asset we know and operate, and we like this investment. We will continue to evaluate our return to ensure we optimize our capital allocation priorities.

From a growth perspective, we will continue pursuing small organic projects and/or tuck-in acquisitions to the extent that risk-adjusted returns are attractive.

With that, I'll turn it back over to Fritz.

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [5]

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Thanks, Fay, and wrapping up on Slide 11. The focus remains on operational execution, maximizing the capabilities and performance of our coke and logistics assets and executing against the oven rebuild project at Indiana Harbor. We'll continuously evaluate opportunities to find the most attractive ways to deploy capital on behalf of SXC shareholders.

Finally, we'll again be focused on executing on our commitment to shareholders by achieving our full year financial targets, and we remain on track to do so after a good start in the first quarter.

And with that, we'll open up the call for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Lucas Pipes with FBR.

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Lucas Pipes, FBR Capital Markets & Co., Research Division - Analyst [2]

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So Fritz, say -- maybe kind of a pretty broad, open question to start. When you think about SXC, where would you put the cost of capital for the business?

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [3]

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That is a broad question. If you look at -- when I looked at it last night, looked at how we were trading in the market price of the SXC shares and SXCP units in the public market versus our EBITDA targets for this year, we're trading less than 7x EBITDA. And when you look at it, for a business that is stable like ours and contracted like ours, we kind of look at it and we say, for deployment of capital repurchasing units, first, and then shares second are attractive. I mean, we -- so I think in terms of -- I'll come back to your question, which is more on our cost of capital. But in terms of using and deploying cash on behalf of shareholders, it's a very attractive use of cash to repurchase units and then shares prospectively at these valuations.

Second, therefore, I think the cost of equity, when you look at the valuations, it's pretty high. And -- but debt markets are attractive. So I think doing the refinancing downstairs is absolutely the right thing to do in the second quarter, which we're going to work on. The markets are attractive, and we'd like to achieve that. We'd like to achieve our goals, as Fay articulated. And then deploy capital on behalf of SXC shareholders in terms of repurchasing units or shares because the cost of equity is pretty high when you look at the valuation of the firm.

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Lucas Pipes, FBR Capital Markets & Co., Research Division - Analyst [4]

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Yes. No, I think that makes a lot of sense. So maybe to follow up on that point regarding purchasing units. What -- are there any limitations that maybe you should highlight in terms of volume or, frankly, capital as well? So how quickly could you move towards repurchasing -- or purchasing units in the open market?

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [5]

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As Fay said, we've -- as the chart showed on Page 10, we put in place an authorization of $50 million with respect to SXCP units. We already have -- we have a small authority remaining for SXC shares as well. I think that anything we would do, we would do in the open market. That's our expectation today. We would do it pursuant to a 10B program, so we would do it in accordance with all applicable SEC regulations. Obviously, we needed to complete the dialogue with the Conflicts Committee, which we've done and terminated, and then issue our results, get our refinancing done and then consider putting this -- putting in place the actions in the second quarter. But I think the size is driven by the authority we received from the board. If you look at the cash print is $155 million and you back up $43 million that's at the MLP, the parent, $111 million. And we have $44 million of net debt. So we have quite a bit of dry powder in order to be able to execute this efficiently and prudently, actually. So that's how I think about the limits. Fay, were you going to add something?

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Fay West, SunCoke Energy, Inc. - CFO and SVP [6]

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Yes. I would just add that under a 10B program, you are limited to kind of 25% of kind of a daily volume trading. So there's kind of a limitation to what you could do on a daily basis.

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Operator [7]

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Your next question comes from Brett Levy with Loop Capital.

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Brett Levy, Loop Capital Markets LLC, Research Division - Research Analyst [8]

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The Granite City outage, can you sort of talk about kind of how many days? Or any rough estimate in terms of either volumes or operating income impact? Or anything kind of a little bit more granular?

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [9]

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So Brett, this is Fritz. I would say it is quite an extensive outage. It's over -- a little bit over 30 days. It was in our plan. And it's been comprehended in our guidance. It just -- it will weigh on the second quarter, and that's really all I'm prepared to say today. I think we're set up for it. The work will begin. We've been planning the work in April. The work begins extensively in the first week of May, and we feel like we have a good plan lined up to execute it within our budget.

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Brett Levy, Loop Capital Markets LLC, Research Division - Research Analyst [10]

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And no customer issues associated with that? The customer sort of is --

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [11]

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No, we're good.

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Brett Levy, Loop Capital Markets LLC, Research Division - Research Analyst [12]

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No. Is everything sort of stocked up ahead and after -- and all that other good stuff?

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [13]

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Yes. Customers -- I mean, we've been -- we obviously continuously communicate with the customer, and we don't anticipate any customer issues from this.

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Brett Levy, Loop Capital Markets LLC, Research Division - Research Analyst [14]

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All right. And then it looks as if you're going to generate a decent amount of cash flow here. Any sort of growth CapEx plans? Or I guess -- where do you guys come out in sort of the buy or build or kind of expansion? I mean, I know you got the $80 million budget, but sort of how much of that is growth? And are you guys sort of looking for any other ways to expand?

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [15]

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If you look at the $80 million of capital, Brett, and you kind of break it down into big pieces, $25 million is related to the execution of the Granite City gas share project, and that work began in earnest in the first quarter. We had actually been doing a lot of work on it in preparation for it, but it just -- it began as we expected.

The second large chunk relates to Indiana Harbor and rebuilding ovens, then we have a normal amount of maintenance capital. The amount of growth capital we have, about $3 million in, to do some work at Convent in order to be able to facilitate unloading of barges, and it's actually quite an interesting project to create optionality for it. I would say that we look at -- as Fay talked about on the chart, we're looking at small organic projects and/or tuck-in acquisitions, particularly around the logistics value chain that would be modest, that would be attractive, that would be priced relatively attractive and would give us options to grow, particularly the logistics business, while we continue to look at ways to optimize our coke business is the right way to think about it. And then relative to valuation, large, or when you look at how we're -- how we've been trading, it's hard for me to imagine anything larger that would be a more attractive dynamic than our own units or shares.

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Operator [16]

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Your next question comes from Phil Gibbs with KeyBanc Capital Markets.

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [17]

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Hey, Phil. Are you there? Are you on mute?

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Phil Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [18]

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Can you hear me now?

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [19]

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I can hear you now.

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Phil Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [20]

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All right, perfect. Just had a question on -- looking from a generic sense, on the coke stock levels in the North American supply chain right now and what's your view in terms of whether or not they're -- they may be a little light given the fact that a lot of people ran down their inventories last year.

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [21]

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A better question for our customers, but I'll just give you my perspective. Of our 3 customers, we've seen operating rates tick up across the industry and blast furnace utilization and across all the steel mills in the first quarter, which has been helpful. You're right in saying that inventory has been depleted over time. I would say, with respect to one of our customer -- I mean, 2 of our customers that they're still -- at least one of them is still continuing to reduce their inventory levels. I'm not going to name the customer. And then one of our customers, we think, over time, you could see things tighten. But I would say that the environment has been a reasonably good one coming into the year, and we feel like it gives us opportunities as we look at the second half and into 2018 if things continue.

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Phil Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [22]

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I appreciate that. So it sounds like a little bit of a mixed-bag, company-specific situations with the customers.

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [23]

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Yes. You really need to look at it company-specific. It's not a ubiquitous, homogeneous market. You got to look at it company-specific.

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Phil Gibbs, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [24]

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Given all the volatility that we've seen this year and basically the last 12 months with China having stopped capacity on coal, reupped capacity, Australia having issues here and there and just remind us about how much the global dynamics can really impact the price. Or are you seeing any rush to look toward securing more mid- to longer-term coal contracts with domestic suppliers to mute some of that volatility quite yet? Or we're not going to be at that point for a couple months?

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [25]

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No, we're not seeing anything in that regard. I wouldn't necessarily think we're going to see anything until we get to the third quarter under normal -- the normal timing of coal buys. Obviously, that's a decision for our customers in consultation with us because we buy together. But nonetheless, we just -- we're not seeing it today, in April. So -- and your point on volatility is a good one. And in the end, I think our customers generally go out annually. And it's been a pretty good strategy to do over time, is to go out annually. So we're just not seeing any change in that so far.

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Operator [26]

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Your next question comes from Lee McMillan with Clarksons.

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Lee McMillan, Clarksons Platou Securities, Inc., Research Division - Analyst [27]

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Yes. I just had kind of a broader, bigger-picture question in terms of kind of where you go from here following the transaction being pulled. You still have the MLP qualifying income issue hanging out there, so where do you kind of go longer term with this? Do you work at getting the ruling reversed? Do you take a different angle to consolidating the structure? Can you give us any sort of just longer-term strategy update on that?

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Fay West, SunCoke Energy, Inc. - CFO and SVP [28]

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So we do believe that we qualify for the 10-year transition period. And so we think we've got some runway from now until -- as we're working through that to look at kind of our structure and optimize our structure. As far as are there any steps that we could take with -- from the IRS or from a regulatory perspective or anything along those lines, I think that we are very limited in what we could do to reverse this ruling. I mean, we are kind of an island on -- by ourselves as far as kind of coke making. And so I think we believe it would be very difficult at this point.

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Lee McMillan, Clarksons Platou Securities, Inc., Research Division - Analyst [29]

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Okay. And then any other angle towards revisiting consolidation or anything like that? Or does it make sense to just sort of leave the companies separate longer term?

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [30]

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Lee, we've terminated the dialogue, and we're going to move on. We just have many things to do, both downstairs at the MLP and upstairs at the GP. And we're just going to move forward. Facts and circumstances can and do change in the future, but that's not on my list of things to do at this point. At this point, it's about executing against our goals, allocating capital wisely on behalf of shareholders and unitholders and trying to create value for both shareholders and unitholders prospectively.

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Operator [31]

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There are no further questions at this time.

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Fritz Henderson, SunCoke Energy, Inc. - Chairman, CEO and President [32]

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All right. Thank you again very much for joining the call this morning and for your interest, support and investment in SunCoke Energy. Thank you.

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Operator [33]

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Thank you. This concludes today's conference call. You may now disconnect.